Usury: Part II

In the first installment we established that the sin of usury is important for two reasons: (1) it pervades our economy and (2) it has been erroneously used as a purported example of the Church changing her teaching. We established the essential terminology for discussing usury which was defined as the seeking of gain on a loan of a consumable thing. We noted that money, although originally thought to have only a use in consumption could be used to consume or to produce wealth. With this background we can further explore the nuances of the Church’s teaching on usury.

Many historians falsely accuse the Church of being opposed to a productive economy. Citing usury, intellectuals such as Weber and Tawney claim the Church’s teaching discouraged investment. As we have seen usury only applies to the loan of a consumable. The Church taught that money could be invested in productive assets or ventures and the investor had a right to ask for a share of the production his money helped to create. Two common forms of investment specifically approved by the Church have been the census and societas. The former involved the purchase of a share of the future fruits of a productive asset over a specified time. For example, an investor could buy a right to a percentage of the crops produced by a farm over the period of his life. As this was not the loan of money with a requirement that it be repaid but the purchase of an interest in land, usury could not occur. The societas was a partnership (our word society comes from the Latin word). Christians were permitted to pool their resources and their labor in a common enterprise and then agree among themselves (within limits) how to share the rewards of their enterprise. These investments in productive assets and enterprises were not forbidden by the Church. In a true census or societas, one could not commit usury as no money was lent (although one could be capable of other sins in these transactions, e.g. fraud or embezzlement). Throughout the late Middle Ages and the Renaissance, various theologians attempted to discuss whether certain changes to these forms of investments transformed them from business investments into loans of money. To generalize, many of the new features were a result of methods of allocating the high risk of ventures based on exploration of the newly discovered lands and the dangers of the seas associated with it. For example, some partners in a societas would agree that some partners would exchange their right for a higher share of the profits for a smaller but more certain share. Although theologians, prelates, jurists and even popes sometimes disagreed about how to analyze these changes, their disagreements do not concern the definition of usury but its application to novel and more complex situations. The situation was complicated since some people tried to evade the prohibition of usury by cloaking loans in the name (but not the substance) of these other forms of activity. Some in the Church conservatively advised against otherwise permissible activity in order to deter such immoral evasions. Yet such a prudential judgment likewise belongs to the realm of the application of usury teaching not the teaching itself.

Some who analyzed these new business structures, both Protestants and Catholics, reacted to the complexity involved by abandoning the ancient objective definition of usury for a subjective analysis. They argued that usury only existed in charging for a loan out of a motive of wanting to do harm to the borrower. Since they couldn’t read the hearts of the lender they would assume if he charged a large amount (biting usury) his intention must be harmful. Their approach offered no principled way of determining how much of a charge was excessive. Is 10%, 30% or 200%? Those who adhered to the true Catholic understanding knew that it was not intention that made the sin (although one’s intention could affect the level of culpability of the usurer). Usury was the charging of a gain on a loan. Some situations may be difficult to discern what in substance was transpiring (and in fact due to the difficulty some people may not be culpable of committing the sin or at least a mortal sin) if they were unaware that it involved usury. The general principle was clear: investment in business assets or ventures was not usury. Usury was the charging of gain on a loan of money. If the transaction was not a loan there could be no usury. The test was objective, albeit often a difficult test to discern.

The second aspect of usury that spurred controversies at the same time was the understanding of “gain.” As we have seen the Church’s teaching did not require a lender to loose money (receive back less than he lent). Christ’s statement “Lend hoping to receive nothing in return” was understood as a counsel to perfection not a commandment on pain of sin. Thus, to give money to those in need was charity; to lend and ask for equal recompense was just. Prior to the late fifteenth century, the money system was stable and gold and silver coins retained a relatively stable value. Also, there were very limited opportunities to invest excess money in productive ventures. Both of these factors of the economy began to change as Europe entered the sixteenth century. The influx of newly discovered gold and sliver deposits from the New World,1 combined with the increased debasement2 of coins by some European Princes, caused the monetary system to experience dramatic fluctuations in value. People began asking when they could charge “interest” (understood as discussed in Part I as a compensation for loss) on loans as a result of these factors. A simple example will illustrate the new concerns. In 950, Beowulf has 100 gold coins in a treasure chest. He lives in an area of England constantly under assault by the Danes. The only economy is subsistence farming. He lends 10 gold coins to Canute who pays him back 10 gold coins in a year. Beowulf puts the 10 coins he receives back in his chest where they remain. The coins contain an identical amount of gold and can purchase the same amount of grain as 10 coins last year. Beowulf has not lost anything by not having these 10 coins sit in his treasure chest all year.

Now let us go forward to the year 1540. Carlos usually invests his excess money in partnerships that are exploring South America and trading with the populations there. He lends 10 coins to Alfonso for a year. When he gets back 10 coins in a year, Carlos realizes that they have lost 10% of their purchasing power due to a massive influx of gold from Ecuador. Also, if he had invested those 10 coins with the Nina, Pinta & Santa Maria Company he would have received two gold coins in profit. Carlos is clearly worse off by having made the loan. Many Catholic thinkers realized that to ask Alfonso to compensate for these real losses was not asking for gain. The problem they found was that real examples were much more complicated and difficult to calculate. Thus, some suggested that the parties might estimate in advance the likely amount of these losses and agree in advance an amount of compensation. Again, there were practical disagreements among faithful Catholics on how to compute these new types of losses; but disagreement on this level does not involve a change to the basic teaching.

Due to all of these debates about application of the usury teaching, Benedict XIV issued Vix Pervenit to clarify the situation. He restated the perennial teaching on this subject: “The nature of the sin called usury has its proper place and origin in a loan contract. This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.” Yet, the Holy Father went on to explain: “By these remarks, however, We do not deny that at times together with the loan contract certain other titles—which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract [i.e. claims to interest (meaning compensation)]. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business [i.e. a societas or census]. From these types of contracts honest gain may be made.” He acknowledges that it is often difficult to discern whether a particular transaction is a usurious loan or another just title. As to some specific contracts referred to him, he did not give a verdict as there was still disagreement among theologians. Yet Benedict XIV warned those who would attempt to exploit the situation by engaging in transactions clearly usurious but using the false pretext of a different other title which did not in reality apply: “some will falsely and rashly persuade themselves-and such people can be found anywhere-that together with loan contracts there are other legitimate titles or, excepting loan contracts, they might convince themselves that other just contracts exist, for which it is permissible to receive a moderate amount of interest [here he uses the term in the modern sense of pure payment on a loan not connected to a loss]. Should any one think like this, he will oppose not only the judgment of the Catholic Church on usury, but also common human sense and natural reason.” Simply because the application of moral principles may be difficult and opportunities for cloaked evasion exist, does not justify immoral behavior or the rejection of the moral norm.

Now, what does all of this mean for our world at the dawn or a new millennium? If application of usury teaching was difficult in the sixteenth and eighteenth centuries, it is certainly more so today. One might speculate that the usurers who bleed our nation dry have designed this complexity to hide their ill gotten gains. Money has become much more susceptible to manipulation and volatility. The dollar bills in our wallets are called “fiat’ currency. This means they are worth only what the government says they are worth. They have no intrinsic value. They are made of mere paper which if you read the fine print entitles you to the dubious right to receive another identical piece of paper in exchange. That is right; a dollar represents the right to trade in a dollar bill for another dollar bill. Even a child can see the circularity of this system. On top of that, the amount of money in the economy is not limited by anything fixing its value. At least in the sixteenth century it was limited by the amount of gold extractable from the ground. Now banks can just create money out of thin air. For example, if a bank has $1000 in assets, you might think they would be limited to lending no more than they have or $1000. This is not true. That is right—banks can lend money they do not have by just writing an entry in their books. This is called fractional reserve banking.3 Thus, there is really no natural control on how much money will be pumped into the economy by banks inventing money and then lending it to people and thus diluting the value of money in supply.

So what does all of this mean? First, we need to be aware of how far the world’s entire monetary system has strayed form Catholic principles. Money has lost all meaning. Banks are charging people a gain on loans of money the banks do not even have. Lenders are charging people amounts clearly constituting gain on loans of money to be used to buy things like cars, vacations and houses (rather than invest in production). As proof of this, credit card companies have calculated exactly how many months of minimum payments they need so as to have made such a large profit that they do not even care if the borrower ever pays back the original advance. An economy flooded with the sin of usury cannot bear good fruits over time. We need change quickly and desperately.

On the personal level, we need to discern what we are doing with our money. If we are investing it in something productive, we are entitled to a share of the profits. This applies even if our investment is labeled by modern business language a “loan” or “debt.” Yet we must really be investing in a productive venture, not a ponzi scheme or some virtual or synthetic business. (Also other moral principles may restrict our ability to invest. For example, we cannot invest in a business that produces pornography, notwithstanding the Knights of Columbus and the US Bishops doing so.) If we are truly lending money to someone for them to spend (to buy a car, to buy food, etc.) we may charge them interest to compensate for the inevitable decline in value of our fiat money over the period of the loan. Since we live in a monetary system much more unstable than even the sixteenth century the payment of $100 next year is certainly worth less than $100 today. With a monetary system that creates more money out of thin air and with the government constantly changing the components of the consumer price index we have really no accurate method to estimate this decline in value. In such a situation of factual uncertainty we can only do our best at estimating and given the seriousness of the issue err on the side of conservatively estimating this loss.

I have only scratched the surface of this issue. It is a very complicated and difficult subject. Is not such a situation exactly why our Lord appointed bishops to rule over us? They are supposed to help guide us in morally uncertain territory. They are there to preserve and remind us of moral principles and help us make difficult applications. Why then are our pastors so silent about usury? Why does the topic only get passing references in the recent Compendium of the Social Teaching of the Catholic Church (I could find only two pages in the entire book that even mentioned it)? Given its complexity and its pervasiveness, should it not be dealt with extensively in such a document? I obviously don’t have the answers to these questions. I can only wonder if the reason has something to do with our pastors becoming hirelings to the usurers. Maybe reasons lie in the covered up Vatican bank scandals of the past several decades?

In conclusion we have seen the Church in accordance with the many injunctions of Sacred Scripture has taught that charging usury on a loan of money is morally wrong. Despite the puzzling silence of our current hierarchy this is and will remain so. As economic circumstances have changed the application of this truth has become complicated. The changing nature of money and the terms used to describe financial transactions have caused much confusion. The principles remain simple. If a loan is involved, no more can be asked than the return of the lender to his original position. If an investment in production arises, usury is not present. The devil as they say is in the details and we live in an economy infiltrated with demonic details. To morally navigate through this sea of usury is difficult yet we need not be led to despair. In the absence of clear assistance from our pastors we can attempt to order our own financial dealings in accord with the perennial teaching of the Church by applying the principles as best we can. As to the larger monetary and financial system rife with institutional usury—it is so far advanced it is likely only an act of divine intervention can reverse it.

Footnotes

As the supply of coined money increased, this naturally caused the value (purchasing power) of individual coins to decline.

Debasement means adding some amount of non-precious metal to coins.[note] This has the effect of causing two coins of the same weight to have different gold contents and hence different intrinsic values.

Fractional reserve banking is one reason Father Dempsey saw our monetary system as inundated with usury. One reason the Church has explained that God forbade usury is that one is charging for something he does not sell since the money lent is returned. How much more so is this true when the bank is not even lending money that it has. It only invents the money to lend it. What loss could a bank experience by lending money it does not even have?

Brian M. McCall
After 9 years in private practice with the international law firm Dechert LLP, Professor McCall joined the faculty of the University of Oklahoma College of Law in 2006. As a practicing lawyer, he represented a variety of companies and banks in international merger and acquisition and corporate finance transactions. Professor McCall teaches classes in Contracts, Payment Systems, Secured Transactions and Corporate Finance. He publishes in the field of Commercial and Business law with an emphasis on the jurisprudence and philosophy of economic legal regulation. He writes regularly for The Remnant newspaper.

1 Comment

Your email address will not be published. Required fields are marked *

Comment

Notify me of followup comments via e-mail

Name *

Email *

Website

Save my name, email, and website in this browser for the next time I comment.

About Us

The Distributist Review is an online magazine that examines culture, politics, and economics from a distributist perspective. If you have any questions about The Distributist Review, please contact us.